Retailers are launching a new generation of e-commerce membership programs modeled on 'Amazon Prime'

Amazon Prime is the most widely known and used online membership program. And it's been so successful for the company that other online retailers are now beginning to explore their own up-front, fee-based programs.

Membership programs offer retailers a number of advantages, including getting consumers to shop habitually at the same merchant.

But there are also major challenges to operating membership programs. The services often come with added costs for retailers, such as absorbing delivery costs, which may not be easily recouped. In addition, retailers must clear a high bar in order to convince customers that they are offering a service that's actually worth paying extra for.

In a new report from BI Intelligence, we define what an e-commerce membership program is and how retailers are taking the Costco model and updating it for the online shopping age. We also assess the advantages and disadvantages of e-commerce membership programs for the retailer, as well as what consumers might look for in these programs and what incentives are needed to get people to sign up. And we include examples of how some e-commerce companies are structuring membership programs and provide an outlook for other retailers and product categories that could benefit from employing the membership model.

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Here is a list of the e-commerce membership programs that we examine in the report:

• Amazon: Amazon charges Prime customers $99 annually in exchange for a bevy of benefits ranging from free two-day shipping to access to premium video and music content. We estimate that there are approximately 53 million Prime members worldwide - and 25% of those members live outside the US.
  
• Jet: The soon-to-launch e-commerce startup based in New Jersey is using the membership model to create a sort of discount-buying club, akin to Costco, but updated for the internet. The company asks customers to pay $50 annually in exchange for access to products that are supposedly 10% to 15% cheaper than anywhere else. Shipping is not included in the fee but the company uses an algorithm to locate the closest and cheapest shipping option among its local retail partners.
• Sephora: The cosmetics retailer recently launched a members-only shopping program called Flash. Members pay $10 annually and receive free two-day shipping, or overnight shipping for $5.95 on all online orders; and, there's no minimum purchase value required. Sephora can likely keep membership fees low because most products the company ships are small, so delivery fees are lower.
• Google: The tech giant also has a membership tier to enroll in Google Express, its delivery service available in five markets. Members can pay either $10 per month on a monthly basis, or $95 for the whole year and receive free same-day delivery from local stores on all orders of more than $15. Compare that to non-members who have to pay $5 for delivery on orders over $15 and $8 for orders that are under $15.
• Instacart: The grocery delivery service partners with Whole Foods, Costco, and Safeway, among others, and offers a membership program called Instacart Express, which costs $99 annually - in exchange, members get free two-hour delivery on all grocery orders. Customers who use Instacart but do not sign up for the membership program must pay $3.99 per delivery.
• Thrive Market: The newly launched organic grocer and wellness retailer asks customers to pay an annual fee of $60 for access to products that are supposedly "always 25 or 50 percent" cheaper compared to competitors. Thrive Market has referred to itself as an online Costco-like retailer for health-conscious consumers. The major difference is that Thrive Market customers don't have to buy items in bulk like they would if shopping at Costco.

In full, the report:

• Looks out how different retailers are putting a twist on the Costco model.
• Includes data about how much shopping club members spend versus regular customers.
• Lists the advantages and disadvantages that retailers face with operating a membership program.
• Outlines the incentives that drive consumers to pay an annual fee for shopping programs.
• Provides an in-depth look at why membership programs could be the key to unlocking the grocery e-commerce market.

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Disclosure: Jeff Bezos is an investor in Business Insider through hispersonal investment company Bezos Expeditions.